Asset pricing and rationing

What does determine asset prices? Well, first of all we should ask which kind of asset we are talking about. Asset can be of different types such as financial asset and real asset. In the context of our economy, we are concerned with real assets. Although the real estate sector is going through a mild recession, houses and flat are still overpriced and overvalued. Moreover, there is no strong tendency that prices of houses and flats are going down. Prices are too rigid to come down. Putting these concerns aside, we can reflect on something that is more worrisome and terrifying.
To account for the pricing behaviour of real assets in our country, we have to go beyond the traditional theory that higher demand implies higher price and lower demand implies lower price. In fact, it may in reality turn out that lower the demand and higher the price - a conclusion that may upset dogmatic free market economic thinkers.
We should come out of the so-called theory which was formulated with some tantalising assumptions that are too unwieldy to be realistic. One such assumption - yet the most formidable - is that income distribution doesn't influence the market price. This rubbish assumption should be thrown into the trash and should be eliminated from the textbooks so that it doesn't misguide and mislead the students.
Traditional theory is almost unable to explain the overvalued real estate in our country. If we think that the price of real estate is a dependent variable, our first task becomes specifying those variables that have decisive influence on real asset prices. If we list those variables, the first and foremost factor becomes income distribution.  Then comes house loan on asset prices given that our population is large.
In a country like us where income distribution is highly skewed, asset prices can't be efficiently determined by free market mechanism. Real asset is not like bread and butter whose demand is price inelastic meaning that increase and decrease of price don't have significant effect on their demand. On the other hand, bread and butter can be inferior goods in the sense that when income increases, there demand decreases. For bread and butter income distribution doesn't have significant effect on demand; highly skewed and uneven income distribution will result in underfed and well-fed households. That means some will be able to buy essentials to meet their need, and some will barely able to do that.
What happens for the demand of real asset when income is highly skewed and uneven? The result is quite opposite and strong. Unlike bread and butter, real asset can be stored or kept in possession for long time, and this unique characteristic makes the difference. Uneven income distribution means higher purchase by some and less purchase by some others where higher purchase by the former group will exactly offset or more than offset the less purchase by the latter group. This is what is happening in our country. A fraction of population has so much wealth in possession that this group is purchasing houses and flats with that idle money.
Here is the dilemma of the free market economy. This blind belief in the free market is leading us to a dark region from which we will have no rescue unless we fasten our seat belt at the right time. Corruption, on the other hand, is adding salt to injury. Black money earned through corruption often finds its way to the holding of huge amount of real assets. In Dhaka city, a disease has already spread among the rich  - and that is holding of real assets. There are thousands who have more than five houses in different locations in this city. What is the justification for this kind of behaviour, and what kind of justification do our policy makers see in this madness? This kind of madness should be curbed and should be controlled by implementing laws. Everyone in this city deserves a good living place and house too. Although we can't ensure such for all given the constraint, we shouldn't ruin their hope and aspiration. Marginalisation of mass people by the insane action of some does deserve punishments. Moreover, wealth earned through illegal means should be investigated properly too. Rationing the holding of real assets would ultimately help curb corruption to some extent since black money will not find easy passage to the investment in real asset.
The government should make laws clearly stating how much real asset a family as a whole can hold and not by an individual because that will prove too difficult to implement. The reason is that people will divide the holding of real assets among individual family members - an outcome totally equivalent to non-rationed free market system. Rationing in the holding of real of asset will cause a stable pricing in the real assets; assets will not be overpriced due to oligarchic effect - the effect of rich in the market.
Under rationing, mass people will not be marginalised due to the domination of the rich. Free market is not panacea for everything. We have to analyse the circumstances and situation whether the so-called theory is applicable in original format or not. If situation demands alteration, we must alter them to make things better. In the context of our country, we need such amendment and correction in the free market policy, especially for ensuring stable and fair real asset prices.
The writer is Faculty Member, the School of Business, North South University.
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